NCPA - National Center for Policy Analysis

Social Security by Choice

March 23, 2012

The experience of three Texas counties offers a realistic demonstration of how Social Security can be successfully reformed. Galveston, Matagorda and Brazoria counties opted out of Social Security in the early 1980s, and have since developed and implemented what they call the Alternate Plan, says Merrill Matthews, a resident scholar with the Institute for Policy Innovation.

  • Like Social Security, employees contribute 6.2 percent of their incomes, which the counties match with the option of providing more (as Galveston does).
  • Unlike a traditional IRA or 401(k) plan, which account holders can actively manage, the contributions are pooled, like deposits to a bank savings account.
  • Top-rated financial institutions then bid on the right to manage the funds, offering minimum interest rates that yield significant protection from market downturns.
  • The plan avoids the pitfalls of pay-as-you-go systems by giving workers only what they pay in.

The experience of the three counties' employees over the past 30 years speaks to the effectiveness and efficiency of the plans. While paying out substantially higher payments to retired workers, the plans do not face burdensome unfunded liabilities that haunt many states' legislatures.

  • A lower-middle income worker making about $26,000 at retirement would get about $1,007 a month under Social Security, but $1,826 under the Alternate Plan.
  • A middle-income worker making $51,200 would get about $1,540 monthly from Social Security, but $3,600 from the Alternate Plan.
  • And a high-income worker who maxed out on his Social Security contribution every year would receive about $2,500 a month from Social Security compared to $5,000 to $6,000 a month from the Alternate Plan.

In addition to protecting the local governments from large debts to retirees, the plans also protect participants from bad markets via the aforementioned minimum interest rates.

  • Most plans have written into them a minimum 3.75 percent minimum rate.
  • Over the last decade, the accounts have earned between 3.75 percent and 5.75 percent every year, with an average of around 5 percent.
  • The 1990s often saw even higher interest rates, from 6.5 percent to 7 percent.

The plans also offer substantially better benefits in other regards, including life and disability insurance that is more comprehensive and easier to access.

Source: Merrill Matthews, "Social Security by Choice," American Spectator, March 15, 2012.

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